Chapter F14
Power Notes
Statement of Cash Flows
Learning Objectives
1.
2.
3.
4.
5.
Purpose of the Statement of Cash Flows
Reporting Cash Flows
Statement of Cash Flows – The Indirect Method
Statement of Cash Flows – The Direct Method
Financial Analysis and Interpretation
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Cash Flows
Increases in Cash
Decreases in Cash
Operating
Operating
(receipts from
revenues)
Investing
(receipts from sales of
noncurrent assets)
Financing
(receipts from issuing
equity and debt securities)
(payments for
expenses)
Cash
Investing
(payments for aquiring
noncurrent assets)
Financing
(payments for dividends, and
redemption of debt securities)
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Cash Flows – Operating Activities
Typical cash inflows
Typical cash outflows
Sales of goods
and services
Merchandise
purchases
Interest Revenue
Payments of
wages & other
expenses
Dividend Revenue
Tax payments
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Cash Flows – Investing Activities
Typical cash inflows
Typical cash outflows
Sales of fixed assets
and other long-term
investments
Purchase of fixed
assets and other longterm investments
Sale of marketable
securities and
investments
Purchase of
marketable securities
and investments
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Cash Flows – Financing Activities
Typical cash inflows
Typical cash outflows
Sales (issuance)
of stock
Purchase of
treasury stock
Sale (issuance) of
bonds and other
money market debt
Repayment and
redemption of debt
(bonds, notes, other)
Borrowing from banks
and other lending
institutions
Payment of cash
dividends
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NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30, 2002
Cash flows from operating activities:
Cash received from customers
Deduct cash payments for expenses
and payment to creditors
Net cash flow from operating activities
$ 7,500
4,600
$ 2,900
Cash flows from investing activities:
Cash payments for acquiring land
(20,000)
Cash flows from financing activities:
Cash received as owner’s investment
Deduct cash withdrawal by owner
Net cash flow from financing activities
Net cash flow and ending cash balance
$25,000
2,000
23,000
$ 5,900
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NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30, 2002
Cash flows from operating activities:
Net income, per income statement
Add increase in accounts payable
Deduct increase in supplies
Net cash flow from operating activities
$ 3,050
400
(550)
$ 2,900
Cash flows from investing activities:
Cash payments for acquiring of land
(20,000)
Cash flows from financing activities:
Cash received as owner’s investment
Deduct cash withdrawal by owner
Net cash flow from financing activities
Net cash flow and ending cash balance
$25,000
2,000
23,000
$ 5,900
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NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30, 2002
Cash flows from operating activities:
Cash received from customers
Deduct cash payments for expenses
and payment to creditors
Net cash flow from operating activities
$ 7,500
4,600
$ 2,900
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30, 2002
Cash flows from operating activities:
Net income, per income statement
Add increase in accounts payable
Deduct increase in supplies
Net cash flow from operating activities
$ 3,050
400
(550)
$ 2,900
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Cash Relationships and Cash Flows
Balance Sheet
Cash
1 Liabilities
Noncash
3 Assets
Stockholders’
2 Equity
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
1
2
3
The cash flows are determined by analyzing
liabilities, stockholders’ equity, and noncash assets.
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Changes in Current Accounts
Accounts
2003
2002
Trade receivables (net)
$74,000 $65,000
Inventories
172,000 180,000
Accounts payable (mdse.)
43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable
7,900
8,400
Change
Debit Credit
9,000
8,000
3,200
2,200
500
These debit changes are subtracted from net income in the
operating activities section of the statement of cash flows.
Think of these debits as deductions from net income in arriving
at net cash flow from operations.
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Changes in Current Accounts
Accounts
2003
2002
Trade receivables (net)
$74,000 $65,000
Inventories
172,000 180,000
Accounts payable (mdse.)
43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable
7,900
8,400
Change
Debit Credit
9,000
8,000
3,200
2,200
500
These credit changes are added to net income in the operating
activities section of the statement of cash flows.
Think of these credits as additions to net income in arriving at
net cash flow from operations.
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Operating Activities – Indirect Method
Cash flows from operating activities:
Net income, per income statement
Add: Depreciation
Decrease in inventories
Increase in accrued expenses
Deduct: Increase in accounts receivables
Decrease in accounts payable
Decrease in income taxes payable
Gain on sale of land
Net cash flow from operating activities
$108,000
$ 7,000
8,000
2,200
$ 9,000
3,200
500
12,000
17,200
$125,200
24,700
$100,500
Start with the accrual basis net income
shown on the income statement.
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Cash Basis
Sales
$1,180,000
Cost of merchandise sold
790,000
Cash collected
Gross profit
$390,000
Changes
from customers
Operating expenses:
Debit Credit
Depreciation expense
$ 7,000
Sales
1,180,000
Other operating expenses
196,000
Receivables
9,000 203,000
Total operating
expenses
Cash
The
changes1,171,000
in the current
balance sheet
Income from Note:
operations
$187,000
accounts are determined by comparing the
Other income:
beginning
balances. Receivables
Gain on sale
of land and ending
$12,000
increased by $9,000 during the period.
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
Cost of merchandise sold
Gross profit
Cash payments for
Operating expenses:
merchandise
Depreciation expense
Other operating
Cost ofexpenses
mdse. sold
Total operating expenses
Inventories
Income from operations
Accounts payable
Other income:
Cash
Gain on sale
of land
Other expense:
Interest expense
Income before income tax
Income tax
Net income
$1,180,000
790,000
$390,000
Changes
$ Debit
7,000 Credit
196,000
790,000
203,000
8,000
$187,000
3,200
Cash Basis
$1,171,000
$12,000
8,000
4,000
$ 191,000
83,000
$ 108,000
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Depreciation
Changes
Total operating
expenses
203,000
Debit $187,000
Credit
Income from operations
Depr. expense
7,000
Other income:
Accum.
depreciation $12,000 7,000
Gain on sale
of land
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Total operating expenses
203,000
Cash payments for
Changes
Income from operations
$187,000
operating expenses
Changes
Debit
Credit
Other income:
expenses $12,000
196,000
Gain onOperating
sale of land
Other expense:
Accrued expenses
2,200
Interest Cash
expense
8,000 193,800
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$390,000
Changes
Gain on sale of
Operating expenses:
investments
Depreciation expense
$Debit
7,000 Credit
Cash
72,000
Other operating
expenses
196,000
60,000
TotalInvestments
operating expenses
203,000
Gain
on sale of invest.
12,000
Income from
operations
$187,000
Other income:
Gain on sale of land
$12,000
Other expense:
The cash inflow of $72,000
Interest expense will be shown in
8,000
4,000
the
Income before income
tax
$ 191,000
investing
section of the
Income tax
statement of cash flows.83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
0
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Cash paid
for
Total operating
expenses
203,000
Changes
interest expense
Income from operations
$187,000
Debit Credit
Other income:
Interest expense
8,000
Gain onCash
sale of land
$12,000
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
0
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Total operating expenses
203,000
Cash paid for
Changes
Income from operations
$187,000
Debit Credit
Other income:income taxes
83,000
Gain onIncome
sale of tax
landexpense $12,000
Other expense:
Income tax payable
500
Interest Cash
expense
8,000 83,500
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
(8,000)
(83,500)
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Rundell Inc.
Income Statement
For the Year Ended December 31, 2003
Cash Basis
Sales
$1,180,000
$1,171,000
Cost of merchandise sold
790,000
(785,200)
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
0
Other operating expenses
196,000
(193,800)
Total operating expenses
203,000
Two different views
Income from operations
$ 187,000
Other income:
of income from
Gain on sale of land
$12,000
0
operations
Other expense:
Interest expense
8,000
4,000
(8,000)
Income before income tax
$ 191,000
Income tax
83,000
(83,500)
Net income
$ 108,000
$ 100,500
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Operating Activities – Direct Method
Cash flows from operating activities:
Cash inflows:
Cash received from customers
Cash outflows:
Cash payments for merchandise
Cash payments for operating expenses
Cash payments for interest
Cash payments for income tax
Net cash flow from operating activities
$1,171,000
$785,200
193,800
8,000
83,500
1,070,500
$ 100,500
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Financial Analysis and Interpretation
Free Cash Flow
Cash flow from operations
$1,400,000
Less: Cash invested in fixed
assets to maintain capacity
(450,000)
Less: Cash used for dividends
(100,000)
Free cash flow
$ 850,000
Use: To measure operating cash flow available
for corporate purposes after providing
sufficient fixed asset additions to maintain
current productive capacity and dividends.
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